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We have this story we tell in business: a vicious loop of misaligned expectations and unrealized dreams.

Investors, we tell ourselves, want short-term quarterly results.

Visionaries have no place in large public companies because all decisions are optimized for the short term win.

Unicorns, companies valued at a billion dollars or more, shy away from their IPO and public spotlight.

Startup founders aim to take advantage of this weakness and disrupt.

VCs tell startup founders to aim for an exit – the moment when they are subsumed back into the hamster wheel of public company performance and short-term investor expectations.

But what if investors were to shift their time horizon to the long term, and to society?

On January 6, 2018, activist hedge fund JANA Partners and CalSTRS (California State Teacher’s Retirement System) sent a letter to Apple asking them to take responsibility for children’s cellphone use. Citing expert research the company pointed out that overuse of iPhones results in declining mental health among children and teenagers, and is linked to poor attention in the classroom, difficulty empathizing with others, depression, sleep deprivation, and a higher risk of suicide. Together JANA and CalSTRS own $2 billion in Apple stock.

We’ve seen this language before from academia, scientists, the medical community, sustainability experts, social justice advocates. Now it’s coming from an activist hedge fund, the world’s largest asset manager, and one of the largest pension funds in the US.

What’s changed?

On one side of the economy, we have the stock market reaching all-time highs and massive tax breaks creating huge cash flows for global corporations. On the other side, we have low wage growth, inadequate retirement systems, and job insecurity among the majority of people.

Fink calls it the paradox of high returns and high anxiety.

Add the failure of government to adapt and respond to issues of infrastructure, AI and automation, and continuous worker retraining. Acknowledge the sudden awareness that our addiction to technology innovation may have pernicious social and economic side effects.

Who can address these systemic challenges? Companies.

“…the public expectations of your company have never been greater. Society is demanding that companies both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” – Milton Friedman, 1970

Friedman was arguing a point of view, not describing the natural order of the universe, but it was a position widely adopted by investors and regulators over the last 48 years.

Is BlackRock being hypocritical?

It seems that the Wall Street establishment likes the passivity of the ETFs. Matt Levine at Bloomberg called Fink’s threat hollow, “..contribute to society or you’ll lose BlackRock’s support — rings a bit hollow since BlackRock’s index funds can’t sell.” ETFs are just indexes of funds with no active money management, so how, exactly will Blackrock tell company management to do better? Sam Zell, an investor, calls Fink a hypocrite for making what amounts to a public policy statement when BlackRock is a rubber stamping passive investor (who should stay that way, in Zell’s opinion).

Most investors still subscribe to these beliefs, and most company executives and boards fear the arrival of activist investors. Last year Nelson Peltz went after P&G, Bill Ackman went after ADP, and Ed Garen after GE. Acronyms are under attack.

What’s interesting is that BlackRock, typically known as a passive investor as the largest provider of ETFs or Exchange Traded Funds, changed their stance and began siding with Peltz and Ackman in the proxy fights with P&G and ADP. BlackRock also took an active stance against Exxon last year, supporting a shareholder proposal to enhance disclosures on climate impact and long-term strategy.

While the biggest asset manager in the world may be changing the rules of the game, it’s not like short-term activist investors are going away.

Lawrence Fink has advice for executives and company boards:

“Tax changes will embolden … activists with a short-term focus to demand answers on the use of increased cash flows, and companies who have not already developed and explained their plans will find it difficult to defend against their campaigns.”

Companies are at fault for not explaining their long-term strategy so that the context of short-term decisions can be better understood by investors.

While Fink’s letter is worth the entire read, I’ll highlight his words for your next strategy meeting:

“Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation and climate change – affect your potential for growth.

“These strategy statements are not meant to be set in stone – rather, they should continue to evolve along with the business environment and explicitly recognize possible areas of investor dissatisfaction. Of course, we recognize that the market is far more comfortable with 10Qs and colored proxy cards than complex strategy discussions. But a central reason for the rise of activism – and wasteful proxy fights – is that companies have not been explicit enough about their long-term strategies.

… But when a company waits until a proxy proposal to engage or fails to express its long-term strategy in a compelling manner, we believe the opportunity for meaningful dialogue has already been missed.”

What does this mean for your company? The hidden killer of innovative ideas and bold visions is the fear of the activist investor. CEOs remain torn between staying the course of predictable performance and taking longer-term bets that increase risks. They believe that investors are wary of this kind of change. But investors are more open to risk than CEOs believe. The principle idea that drives the hedge fund industry is that well-managed risk (and greater risk well leveraged) yields a greater return.

In your next board meeting, innovation offsite, or budget planning session, review whether your company has publicly articulated your vision, your moonshot, and your path to get there. Investors are more likely to want more investment in potentially disruptive business models if it’s part of a long-term play.

Investors are now becoming more active in understanding how you’ll achieve not just shareholder returns, but the needs of society, community, and the environment will If your strategy is not visible, adaptive to the changing environment, and open for discussion, it’s time to act.

—

Jen van der Meer is the Founder of Reason Street and is an Assistant Professor at Parsons School of Design Strategies. Jen is on a mission to measure the value of everything. She believes that business models can be designed to build the future we want to see.

I’ve been working on a social impact curriculum and program at Parsons The New School. We asked student venture teams to apply to a course called Venture Lab, designed for launching potentially scalable ventures. We’ll also be studying the larger question of entrepreneurship inclusion, and how young ventures can develop, validate, and articulate their social impact vision.

Looking forward to Spring’s cohort!

VENTURE LAB 2017 – 2018 PARTICIPANTS

We are delighted to announce the 2017-2018 Venture Lab Winners!

In alphabetical order

Broke Broadway

Broke Broadway, a newly-incorporated non-profit organization, intends to open a performing and fine arts facility that will be called “Mom Mom’s House” outside Newark, New Jersey. Their mission is to make performing and fine art resources accessible and available to all.

Entryway Design works to serve communities that are threatened with symbolic or physical displacement by developing and implementing several prototypical models that combine design, design thinking, and social advocacy.

ESL Works strives to build a more diverse, efficient, committed, and skilled workforce for the American food industry by designing and delivering English language training and professional development opportunities for employees who face communication barriers. As they expand, ESL Works plans to develop online training tools that will provide affordable resources to individuals who don’t have access to on-site classes.

Leadership Institute for Global ChangeMakersLeadership Institute for Global ChangeMakers provides professionals of color in the nonprofit arts and culture sector with leadership development opportunities that promote active, deep, and authentic personal development for racially and culturally diverse people at the emerging and mid-career stages of their career.

Leform
Leform is a peer-to-peer platform that aims to democratize learning by connecting young professionals and college dropouts who want to develop career and life skills with real world practitioners at an affordable cost.

Modesty Group is a fashion brand that aims to transform the relationship women have with the beauty and fashion industry by designing simple, elegant and comfortable women’s clothing at affordable prices. Their enterprise started in Senegal, however, they are currently seeking to expand to France and the United States.

Nightingale Farms seeks to tackle poverty, environmental, and socioeconomic issues in an effort to restore degraded ecosystems in the Jamaica Blue Mountains that are caused by unsustainable practice of conventional coffee farming.

Cheryl Bennett, Environmental Policy and Sustainability Management (MS), School of Public Engagement Ralph Olacio, Environmental Policy and Sustainability Management (MS), School of Public Engagement

Nora

In India, personal feminine hygiene is considered a taboo subject, and 95% of India’s sanitary napkin market uses harmful chemicals known to cause Urinary Tract Infections. Nora is creating awareness about the importance of personal feminine hygiene by creating affordable and quality made feminine hygiene products. Their first product will be sanitary napkins made of 100% organic cotton.

Original Kids (OK) is a community that encourages creative expression among children and adults. Through the lenses of neuroscience, mindfulness, and the arts, OK provides opportunities and tools to develop the emotional intelligence, self-awareness, and resilience needed to thrive in the 21st-century. They plan to do this by collaborating with co-working spaces to design learning experiences, programs, and tools that inspire people to live creatively.

Spirius Breathing Mask is an attempt to address the deteriorating air conditions in cities globally by designing a breathing mask that will be reusable, aesthetically pleasing, and has the ability to filter out air pollution.

Uput is attempting to develop a way for millennials to broaden their understanding of diverse viewpoints and perspectives about current events. They plan to do this by creating an online news platform where people are encouraged to debate current world issues and comment on content from a range of sources.

Imagine Kelvin, Drucker, and Brillat-Savarin sitting down to a meal prepared from a Blue Apron subscription box. What would they think of today’s digital business models, tapping into troves of data, with more moving parts and seemingly endless opportunities to measure?

When industrial-era companies attempt to start a new business, or transform into digital services businesses, adopting new mindsets is often the hardest part. The primary dominant logic of the firm must change starting with the core unit of economic value.

Shifting from Products to Services

In a box-based business, the box is the primary unit of economic value quickly followed by income statement metrics. In a discussion about quarterly results, you’ll hear questions like: “What’s the order uptake?” “What’s our contribution margin?” “How can we improve our channel margins?” Whether selling through retail or an established sales force, box-based executives going to bed at night thinking about boxes and margins. “How many more boxes can we sell?” “How do we improve our margin?”

In a digital services business, you’ll notice a big difference.

The unit of value is no longer the box. It’s the customer relationship. Quarterly discussions all center around the KPIs of customer health. The questions across many digital service business models are the same: “How is retention trending?” “What’s our lifetime value?” “What’s is the cost of customer acquisition?” Whether selling razors and razor blades, digital storage, online games, cloud-based design software, or subscription clothing-in-a-box, digital services executives go to bed at night thinking about customers. “How do we get people to stay longer, refer their friends, and value us more?”

Customer Drivers to Digital Service Models:

What’s driving this shift to digital services and direct relationships? A number of technical and cultural trends indicate that customers seek digitally-driven service offerings:

From things to services: In an attempt to simplify and declutter, we seek experiences that are temporary, rather than assets we have to store.

From ownership to rentership: 20-30 somethings who grew up during the recession see cars, mortgages and other big-ticket items as a risk rather than investment. Companies who survived the recession shifted heavy capital expenses (Capex) to lighter operating expenses (Opex), a trend which helped further drive cloud service adoption.

From linear to circular: A younger generation is showing interest in how things are made, re-used, and re-energized, avoiding direct-to-landfill waste. Companies are taking more responsibility for the full lifecycle of their products, and services business models help them create and capture value throughout.

From buying as a pleasure to buying as a time-suck: For daily needs like food and beauty products, we want time-saving convenience which reduces our cognitive load. For business buyers, it’s easier to try a free version of the software and selling up vs. going through extended procurement cycles.

From passive consumption to outcomes-based performance: Evolving in the health and other sectors, key stakeholders are demanding tighter partnerships and pay-for-outcomes contracts. Digital service models are better prepared for plug-and-play multi-partner combinations.

Decoding the KPIs of Digital Business Models:

]The # 1 You Need to Measure: Retention (and its Opposite, Churn)

In the leading digital business model archetypes of today, retention is the name of the game. Companies ranging from Netflix to Dropbox to Stichfix to Dollar Shave Club make more money from existing customers staying with the service than from net new customers. One of the drivers of such aggressive exponential sales growth for these companies is the later stage result of compounded loyal, repeat customers returning for more.

The metric for measuring churn: the # of churned customers / the total number of customers in any given time period.

Retention curves come in different shapes and sizes. In a healthy business, the retention curve flattens out as customers get value from repeatedly using the service. A few people cancel after the first month. Then some more people cancel in the following months as they decide whether or not to keep paying. Then at some point over the next 12-18 months, those left become long-time committed customers and the churn stops.

The Growth Metric: CAC to LTV Ratio

In the first dotcom era, companies famously paid a fortune to acquire “eyeballs” but failed to turn users into paying customers. In the digital business models of today, you do want to know if you can make more profit from your customers than it costs you to acquire them. You’ll need to determine two basic numbers:

LTV = the Lifetime Value of a typical customer

CAC = the Cost to Acquire a typical Customer

Lifetime Value: Best viewed through the lens of churn and retention rates following cohorts of customers, lifetime value estimates the average: Lifetime = 1/Customer Churn

Cost of Customer Acquisition: Understand the total costs you spend to acquire users and turn them into customers. Add up all of the critical sales and marketing expenses, including the cost of salaried salespeople, content creators, external SEO specialists. In your calculation, only count net new customers that can be attributed to that period’s acquisition efforts (don’t count your lifetime value returning customers). CAC = Total cost of Sales and Marketing in a period / # of Net New Customers Acquired.

While many debate the formulas, methods of measurement, and heuristics, a number of fast revenue growth companies have followed some variation of the following ratio:

1:3

CAC: LTV

This means for every $3 in lifetime value, $1 is spent on customer acquisition, to achieve a successful sales growth curve.

Cohort Measurement:

In digital business models, cohort measurement is how you determine patterns and trends over time, and attributing key acquisition activities to the effect on lifetime value and payback period. A cohort is a set of customers grouped by common characteristics.

Google Analytics now shows customer cohort by time period (when users first came to your site). Other marketing analytics dashboards give you the ability to group by size spend, acquisition channel, and other attributes.

The Perils of Digital Service Models:

Digital services revenues from models like SaaS or subscription box sales are slow to build at first, with cash outflow far outpacing cash inflow in the early stage. You can kill a digital service business model by stepping on the gas before you’ve achieved high customer retention rates. In the startup world, there is natural attrition- companies fail to get Series A or survive the jump to Series B if they cannot prove they have created a service that customers love.

When larger incumbents invest in digital service models, they often miscalculate the growth phase, imagining that the launch phase is similar to the product launch of a box or product-focused market scale-up.

Net Present Value is hard to calculate accurately before you begin because of the high likelihood of failure at the moment of scale-up. Retention and marketing leverage (CAC: LTV) are such critical drivers in the model you will benefit from funding those businesses that demonstrate their ability to deliver the best metrics and tinker over time, rather than trying to predict these results ahead of time.

The Promise of Digital Service Models:

Once the business is established and takes off, it can grow very quickly as new customers are added to cohorts of returning customers, and recurring revenue predominate. Companies need measurable systems in place to track all of the moving pieces.

Product development is not an upfront-only spend, but instead becomes a steady and increasing investment in new service development. The work of agile service development is accompanied by agile marketing, with fully connected systems in place, product and marketing teams have strong visibility into the business.

Growth becomes a function of achieving customer milestones, and the business focused on how to perpetually create value through the customer’s view. Digital service companies thrive when they love their customers more than they love the product and service they are delivering. They aim for a North Star vision that improves the lives of the customers they serve. Ultimately, in a digital service business, she who amasses the largest tribe of high lifetime value customers wins.

Jen van der Meer is the Founder of Reason Street and is an Assistant Professor at Parsons School of Design Strategies. Jen is on a mission to measure the value of everything. She believes that business models can be designed to build the future we want to see.

Do industrial era executives have blind spots when trying to understand the success of disruptive digital-first competitors?

Let’s take the case of media and the metrics of ratings vs. subscribers.

Traditional TV and cable execs are still struggling to understand content consumption habits from video-on-demand, gaming consoles, cable set-top box, streaming, app-based, and old school broadcasting. If they can’t keep an accurate track of ratings, they don’t get paid by their advertisers.

While 8 major network studios will get the data, Netflix is opting out. According to Variety, a Netflix spokesman said: “The data that Nielsen is reporting is not accurate, not even close, and does not reflect the viewing of these shows on Netflix.”

Why does Netflix not want to know the ratings of their shows?

1/ Different Economics Drive Netflix

Netflix just ended their third quarter with astounding revenue growth. The company reports subscriber info alongside their financial performance, topping out at 104 MM subscribers, adding 5.3 MM in total (blowing past the 4.4 MM projected). They plan to raise prices, as well, because they believe the value they are creating for customers is increasing.

The company will use the money from subscribers and increased prices (and lots and lots of debt) to increase in original content spend to $8 billion next year.This is more content than any media company has ever acquired in the history of media. More than ESPN, even, and they don’t buy sports viewing rights.

“Generally speaking, these kinds of traditional ratings don’t matter in a world where success isn’t measured by specific time slot. They are especially irrelevant on a subscription service that doesn’t sell ads. We measure success by subscriber numbers and hours people watch, and we do release those figures quarterly.” – a company spokesman from Netflix said in 2016, the last time old media tried to out Netflix’s ratings with dubious measurement technology.

Their revenue growth is driven by more subscribers, more valuable content, and now higher prices, a virtuous circle.

Competing against Netflix’s phenomenal growth is hard. Competing when you are using different metrics makes it near impossible.

But there is another reason why Netflix may shy away from ratings.

2/ Ratings = negotiating power

Content creators, actors, writers, and producers still operate in both worlds: Netflix AND ad-supported content.

The Duffer Brothers of Stranger Things, Aziz Ansari of Master of None, Jenji Kohan of Orange is the New Black all have to negotiate their contract renewals along with cast members and other talent. In the traditional TV world, ratings translated into increased contract values for producers, directors, and actors.

We have to go back in time to the Golden Age of Hollywood to remember how this all started out. Actors had year-long contracts and were part of a “stable” of rotating cast members on the sets of Metro Goldwyn Mayer, Warner Brothers, RKO and other studios. The studios controlled all of production and became dominant, with actors, producers, and other players in the system unable to negotiate better salaries or fees if their content was a huge hit.

When the studios were broken up following antitrust negotiations, these types of yearly contracts fell out of vogue. The star system was born, and major actors, producers, directors, and othertalent became free agents, free to negotiate higher pay for bigger audiences.

To demonstrate how big your audience is, however, you need ratings.

I recently spoke with a young content creator who had a small production deal with Netflix. He is desperate to know the ratings of his show. Knowing the ratings is a KPI from his perspective, and would help him then negotiate with Netflix, and also with other more established companies who factor ratings into the value of his work.

When Nielsen announced ratings data for streaming video on demand content, Megan Clarken who oversees video measurement products said, “Being able to follow assets across all these forms of consumer consumption, being measured apples to apples by a third party independent measurement is incredibly important for the studios, for the licensors or the rights holders of content.”

Perhaps, then, Netflix the newest newest thing that is based on the oldest idea in the media industry, and takes us back closer to the Golden Age, when the studios had all of the power.

What does this mean for incumbents trying to understand digital disruption?

It’s critical not to be blinded by the dominant logic KPIs that drive your growth. Netflix is a powerful disruptor in the media business. Subscribers x prices / content is truly the best game in town right now.

At the same time, all industries are transforming digitally, and power is the name of the game. While ratings fit the business model of ad-supported business models, ratings also gave creators more power to negotiate. Be wary of digital saviors who stamp on the metrics of the past.

20 years ago, I was a 20-something digital punk strategist. The internet was going to change the WORLD. I would ply my trade telling established Fortune 1000 clients that they had to move swiftly. Radically transform your companies into a digital businesses. Fast. Or risk annihilation.

What followed was one of the most rapid rise and fall in company bets and valuations ever seen in the history of business. When the dot com boom went bust and everyone came to their senses, digital was taken from the headlines and put into a box.

A box made from PowerPoint shapes.

The headline that once said “Digital Transformation” was now in a box in small font that sadly read “digital enablement.”

Digital Enablement

Digital only helped industrial-era companies continue on the efficiency and optimization trajectory. The dominant business model stayed strong, made now more profitable by technology investments that made things cheaper, faster, with better margins. Pesky unscalable humans were designed out of many processes, all in the name of resource efficiency.

Digital enabled the leading companies of 20 years ago to believe that they simply had to optimize forever.

Oprah will tell you – don’t be the enabler.

Don’t enable that ex-boyfriend who keeps asking for rent money. He’ll never learn to take care of himself. In the same way, big companies that see digital as an enabler are less capable when it comes to transformation. All risk being left in the dust by the digital-native business model innovators today.

During the dot.com boom and bust many new companies launched with zero or negative profits all chasing the possibility of massive scale. The dot era startups new how to create value with free content, music, and technology, but not how to capture value in the form of actual money from customers. In the wake of the bust, the new era business model combinators emerged intent on massive value creation AND capture.

Today’s successful digital native companies are business model innovators at their core.

Digital transformation creates a new paradigm that makes the old business model obsolete. Business model innovators never stop evolving and combining.

Netflix started with experiments sending VHS tapes in the mail, before renting DVDs. The company quickly adopted the subscription business model, Netflix made a hard pivot to develop streaming services, and then made a big bet on original content. Lillehammer. House of Cards. Orange is the New Black. Now Netflix has such strong operating performance and financial leverage that they spend more money to develop new programs than any media company in the industry.

Amazon went from selling books on the internet to become the everything store now threatening the entire retail industry. The company didn’t have to optimize an industrial-era supply chain and data infrastructure dependent on external vendors to define their digital roadmap. They built their own, and then recognized that their cloud infrastructure was a business unto itself. Now, AWS (Amazon Web Services may be the company’s leading business model.

Meanwhile, most industrial era companies see all of this digital opportunity and are still just looking to optimize.

Only 20% are taking a digital-first approach to transformation, according to Gartner’s 2017 CEO survey. 29% are outsourcing digital to external providers. 17% per cent have no ambition for digital business at all. To be fair, Gartner was signaling success in this survey – finally CEOs are focused on growth, and digital. But when will n = all CEOs? Optimization only works for so long, until it becomes a burden, and you’re cutting into the muscle and bone of your organization.

What should you do if you are an innovation leader?

1/ Make the case for business model transformation
At the senior most levels, make the call- have you announced your business model innovation intentions? Are business model innovation goals built into your Key Performance Indicators? What are your criteria for investment in digital business model transformation efforts – for revenue, for customers, and for data? How are you encouraging your leaders to find new value propositions that creatively generate and capture value?

Enable no more.

We’re reaped many of the benefits of digital focused internal optimization and supply chain efficiency. But mobile phones/computers in the palms of more than half the world means that the balance of power has shifted to the customer.

Customers have

endless

choice. They can replace you with alternatives that are more convenient, compelling, and entertaining. It’s time to re-evaluate the value propositions you present to customers.

The supply side logic of the industrial era is already becoming supplanted by companies that own the demand chain. She who amasses the biggest and most engaged audience will win.

2/ Don’t start from a blank slate – know your current business model

The biggest mistake business model innovators make is to start with a blank page. Popular tools like the Business Model Canvas have been widely adopted in startups and large enterprises. But make sure before you start handing out the Sticky Notes and Sharpies – you’ll want to define the current business model.

Otherwise, the dominant logic will kill your idea before it begins.

Dominant logic is the disease that killed Kodak, Blockbuster, and Nokia, and it threatens every successful large-scale company facing disruption—which is all of them, including Google. The danger isn’t so much the disruption itself, a product of fierce new competition and shifts in the technology landscape; it’s the faulty mindset that hampers senior management when it’s preparing for and responding to non-linear change.

“Dominant logic consists of the mental maps developed through experience in the core business and sometimes applied inappropriately in other businesses.”—C.K. Prahalad.

Digital businesses operate differently than bricks-and-mortar models. Subscription models are driven by retention, which takes time, love and investment to earn. Two-sided marketplaces are driven by network effects. We have yet to see a successful subscription box company emerge from established CPGs or retailers for a reason – the time horizons and patience required do not fit neatly into the current KPIs.

Move beyond your lean experimentation efforts and build-to-learn innovation accounting. Show how your new business model complements or effectively disrupts the current model. Be explicit with numbers and projections shaping up the opportunity. Be creative in how you create value for customers. But also translate to speak in the language of the CFO and how your business model innovation will capture value.

3/ Define your North Star, and envision business model options for growth

At the same time, you don’t want to get lost in analysis paralysis and short termism, constrained by the quarter-to-quarter worries of the firm. To break out of the constrained dominant logic of today, develop a North Star vision.

Where are you headed? How do you measure your progress not in valuation, but in human lives served? How do we see a more just, ecologically sound, and better world?

Then anchor in on today’s dominant logic business model. What’s at stake? What do you have to lose?

From this perspective, you’ll be able to then launch into new business models, shaped around new value propositions that creatively address emerging and latent customer needs. Generate multiple options and multiple paths that could take you to your true north, and make sure your dominant logic is not constraining the space of possibility towards the most effective outcome.

Now is the time for Digital Business Model Transformation

My timing was wrong in 1997 about the need to urgently transform your digital business. I have also cried wolf every year since, so don’t listen to me.

Instead, observe the extraordinary business model combinator trajectories of Airbnb, Amazon, Google, Facebook, Apple, and the newly funded successful revenue juggernauts that appear out of nowhere.

Startups need to focus. The best way to focus is to develop a powerful vision, and anchor back to the current moment to find your first customer to propel you to that vision.

Start with the customer segment that has the most unique, discrete pain, and make sure the value proposition solves for that pain.

Why pain?

The starting customer segment is more likely to pay attention to a message, a phone call, or an Instagram ad if they are constantly reminded of their pain.

If you find yourself in a hospital, you may have encountered the pain scale:

The pain scale helps nurses and doctors focus. The pain scale also increases compassion for the patient and a holistic sense of the human body. It aligns the entire care team to ask the patient to describe their problem, in their words, and in their context.

The Customer Pain Hierarchy can help you focus where to start your Minimum Viable Product.

The Customer Pain Scale, Explained

Use this scale to rank pains on a continuum when searching for unsolved problems in a customer’s world. The higher and more painful, the better for the company. Follow me on a tour of the ads in my search, email, and social feeds, and I’ll critique the accuracy of the pain diagnosis and learn how to use the Customer Pain Scale.

1/ There’s No Pain Here

Startup founders are often guilty of focusing on the tech first, then the customer later. The number one reason startups fail is because they realized there was no need.

But big companies often suffer this fate as well.

Here’s a clearcut example from IBM:

IBM does not even bother to describe what my pain or problem might be. It’s a classic solution-focused ad, using industry jargon, dropped right into my Facebook timeline of kid birthdays and Welsh Terriers. This simply won’t do- IBM Watson has to figure out a pain, and figure out if and how I am in pain, and not use concepts like “B2B architecture.”

The best way to test for need is to try to find out if the customer is in pain, and if the solution solves for that pain. If there is no pain, there is no need for the solution, no need for this so-called “B2B architecture.” Time to start again, IBM.

2/ You May Think I’m in Pain, But I Don’t Think So

Direct conversation with customers is so crucial to get out of your head and into the mind of the customer, because the customer may disagree with your diagnosis, or just not care.

Consumer finance companies often get caught in the future pain trap. We all need to rebalance my 401k. But today, we are busy.

Let’s look at Ellevest, who is worried about the financial future of women.

First, they try flattery:

Then they try to convince women that they do not have the right financial plan. Apparently typical financial planning methods focus on the shorter lifespan of men and don’t take into account “career breaks” and the gender pay gap.

But is this enough of a reason to act today? Where’s the message of the future in terms I can understand, right now?

4/ I’m Subconsciously in Pain, But I Don’t Know It

We humans are not fully aware of our thoughts. 80-90% of what we know lies in our subconscious mind. Innovators often want to tackle wicked problems that are deep and systemic. The challenge is that many of our surface level societal problems like obesity, diabetes, depression, and drug addiction have root causes that are deeply hidden in our culture.

The Culture Map

When you start a company trying to tackle a big issue, you have to learn how to meet people where they are. Communicate in words that describe what they see, that they are willing to talk about.

Granted, Headspace and Talkspace are different solutions. Different “spaces.” If I know I need a therapist and the real pain is spending the time to find one in my busy schedule, Talkspace speaks to that pain. But if I don’t know I need help slowing down in the first place, Headspace meets me where I am.

5/ I’m Going to Grin and Bear it.

Customers can be stoic and have a high tolerance for pain

Fitz’s closet organizing solution is a good example.

I have a messy closet. I am like this woman in the photo, rooting through clothes on the floor to find my shoes. It is painful every morning, and costs me time. I admire the Pinterest boards of perfectly organized capsule wardrobes and celebrate The Life Changing Magic of Tidying Up. But, I do nothing.

I have learned to live with my messy closet ways. No amount of solution will get met to address what I see as a bearable pain.

6/ That’s a Pain for Others but Not For Me

Searching for pain is difficult, but sometimes there are the magic words: “I don’t have that pain but I know someone who does.” In fact, it’s a great question to ask at the end of a failed customer interview, “Do you know someone who has this problem?” Then do the hopefully obvious follow up – get their names and contact info and figure out if they have one of these bigger pains.

Even when you launch, you may benefit from social marketing to folks who you think might have the pain, but who only know people who do.

Take Hubble:

I’m a huge Warby Parker fan, but I do not wear contact lenses. I do know many people though who struggle with the annoyance of prescriptions and cost of lenses. So, I may very well share and forward this sponsored post to people I know are in pain.

If you find you’re hearing that’s “someone else’s problem” – don’t stop – keep moving until you find your target customer and figure out the size and shape of the pain.

7/ I’m in Pain. It Keeps Me Up at Night

The standard interview guide for startup founders often leads to this question: “What keeps you up at night?” ‘If you find you can get in that list of top 2-3 things that keep the person up at night – then jackpot, you’ve hit the bonus.

Just a few nights ago, I couldn’t sleep. I could barely read my news apps and thought sadly about my diminishing vision.

Then squinting I saw this email message pop up from Warby Parker:

Warby Parker hasn’t read my mind. They’ve just sent me a digital version of the postcard I get from my dentist. But now I know it’s time to face facts, accept my declining vision, and get a new prescription.

8/ I’ve Had Enough, I’m Looking for a Solution

Once you find a customer in pain so big it is keeping her up at night, test to see if she is motivated to search for a new solution.

I need to establish a workout routine. But ever since my daughter was born, I find it hard to choose. I find though that I am not willing to give up time with my daughter and family to run to a class or gym. So all of the ads for fancy Equinox clubs and boxing gyms don’t do it for me – I would rather hang out with my family.

I’m starting to search for a solution that does both- working out with my kid.

I shouldn’t be surprised that I can hire a personal trainer for my child in Manhattan. But that’s not the solution I was looking for. That takes us to #9.

9/ I’m in Pain, I’ve Looked and There is No Solution

If you’ve found someone in pain who has already looked for a solution, but not found it yet, act fast.

Brooklinen sells affordable luxury sheets. Just a few summers ago they were in the NYU Summer Launchpad accelerator conducting customer discovery. One of the founders experienced the joy of high quality hotel bed sheets, but was disappointed to learn that he couldn’t purchase his own set anywhere affordably.

When the founders got out of the building and talked to customers, they found a consistent pain point: customers suffering from scratchy sheets that make you feel like you’re still in a dorm room. Their customers were actively searching for high quality linen, but overwhelmed with choice and horrified by the price. Brooklinen learned how to supply high quality sheets direct to their customer through digital channels, and they hit the magic growth curve of pain-solution fit. This year they are at a $50 MM and on a path to further customer-lead growth.

Pro Tip: #9 is tricky if your customer has already started to build a solution of their own. For Brooklinen, they found no customers trying to source their own sheets – it was a fairly complex endeavor. In business software, however, this kind of home brew solution pops up all of the time. Say you are focused on project management pain points, and you discover that your potential customer has initiated an internal effort to build a custom solution. Beware! She may not want to give up her tinkering, it’s her pride and joy. In these cases, keep probing to test whether the temporary solution is tolerated.

10/ My Hair’s On Fire

At the top is a hair-on-fire problem: a problem so big and so painful the customer may actually take a risk and try your tiny startup they’ve never heard of before to douse the flames. They may even pay you handsomely for your solution.

When Airbnb started in San Francisco, they languished a bit. They tell the origin story of their company – learning how to use their innate design skills to photograph and stage apartments and turn the sleepy home rental industry into the fastest growing hospitality company of all time.

Airbnb knew they had a pain point on the guest side of their 2-sided marketplace. Hotel prices in NYC during high volume weeks can start at $500 for a small dark mildewy room in midtown. That’s hair on fire pain for many people. At the same time, while the rest of the US was struggling in a real estate crisis NYC’s rents were still rising. By showing hosts how to market their apartments on Airbnb, they solved a major pain point – helping to cover the rising costs of rent.

If you trace the true origin story of any large revenue-generating startup, you’ll find a pain point.

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In sum, the Customer Pain Scale tells you that the higher up the pain ladder, the more the market will pull your solution forward without a heavy lift. The lower down the pain ladder, the more you’ll have to spend to sell, educate, and market your product.

So go talk to your customers before you build your next feature. Move beyond the narrow range of problems that your current solution may solve. Better yet, dig in the depths of our bigger problems hidden beneath the surface culture, but make sure you understand how we’d talk about that pain in everyday language. Have genuine interest in the problems customers face in life, and meet customers in the words and language they use to describe their pain.

In all of these cases, connected devices are reshaping business models. These new models are in turn shaping the cultural expectations for what we expect of the things in our lives. We used to just think of things as we bought, owned, controlled. Things that were silent. Things that didn’t talk back. Things that didn’t keep a record of everything we say and do.

But now these things are things of the internet. The concept of the internet of things, #IoT, is misleading. It sounds like we’re still in charge of these things, who now are connected to the internet. Instead, the nature of these newly connected device business models questions the nature of ownership, access, and who’s in charge.

We change the business model first, without thoughtful intention for how these connected things change our lives.

How do we expect the things in our lives to behave?

In this first post, let’s take a look the Police Body Cam, and how this connected device business model and how new behaviors shape our ethical understanding of people and things.

Police Body Cameras brought to you by Taser

The business model pitch: give police departments free body cameras. We’ll collect the largest dataset in policing to create and own the digital evidence market. Freemium devices meet data-as-a-service.

Taser is changing their corporate name to Axon, which will continue to sell Tasers under the Taser brand, but is reinvesting cash to become a software and data company. The freemium camera product is an opportunity to sell “evidence seats” within their growing services: Evidence.com, records management, fleet services. Axon found that the adoption of their body cameras was slowed down by inertia and regulatory issues. They are offering the camera for free, for one year, including infrastructure to handle the footage and online training.

The customer experience: the promise of the body cams is not just the opportunity for evidence collection. The founder and CEO Rick Smith told Techcrunch that the real opportunity is in reducing dreaded desk work. “Cops spend two-thirds of their time as a data entry clerk,” Smith said. “And when it comes down to it, no one trusts those reports anyway! We have much better information coming from the camera. It contains everything you would put in the report.“ “We believe we can cut that bureaucratic load, and if we can do that, we’ll effectively triple the world’s police force.”

The cultural implications: The rise in body cams was in part fueled by controversial police shootings, the Black Lives Matter movement, and was proposed as a way to hold police accountable. Michael Brown’s family campaigned for every police officer wear a body camera after a grand jury acquitted the police officer who shot their son.

We can look to philosophers from two centuries ago and futurists to describe the cultural conundrum of today. In 1838, philosopher Jeremy Bentham imagined the Panopticon: a system of perpetual surveillance. Bentham imagined changing the architecture of prisons, schools, factories, and hospitals. How it works: in a central tower the watchman can turn and view everyone in their cells.

In 1975, Francis Foucault described the asymmetrical power dynamic of the Panopticon. For the prisoner, “he is seen, but he does not see; he is an object of information, never a subject in communication.”

Jump forward 40 years + later and the panopticon is present in nanny cams, NSA data surveillance, security cameras, and CCTVs. But the advent of handheld video cameras and cellphone cameras happened. From Rodney King to Philando Castile, bystander videos turned the cameras on power itself, filming police action and killing for all to see.

Futurist Jamais Cascio described this multi-way surveillance the Participatory Panopticon. In 2005 he envisioned a world where “what we see, hear, and experience will be recorded wherever we go… We will carry with us the tools of our own transparency, and many, perhaps most, will do so willingly, even happily.”

From Culture back to Business Model

There is no evidence of senior executives of Taser / Axon referencing Bentham or Foucault. The cultural implications of the free body cam pose new questions for our growing panopticon. The business model choice to give the cams away for free is significant: for shareholders and citizens.

Nor are all police departments. Taser / Axon failed to win the NYPD’s open bidding process for a pilot program of body cameras. After Mayor Bill de Blasio prohibited “stop-and-frisk” procedures by the NYPD, he then promised that every NYC officer on patrol would be outfitted with a body camera by 2019. Taser / Axon lost the most recent bid for a pilot program of body cameras, which went to Vievu, a startup. Vievu promised more stringent, encrypted and secure cloud storage of evidence, outside of the confines of the NYPD.

In NYC, the choice of startup Vievu has not mollified community activists, who continue to ask tough questions about the technology, methods, procedures, and implications through legal opposition.

The freemium device move from Taser / Axon is a move aiming to disrupt the disruptor from within. These business model moves between Vievu and Taser / Axon pose new questions. If digital evidence data is stored outside of government in private company clouds, who owns that data? Who can access that data? Who pays each time evidence is subpoenaed from law enforcement, the courts, or requested by citizens?

In sum, connected devices will change how we connect, communicate, govern, and live.

The business model choices we make have inherent cultural implications.

Companies with foresight will need to think several steps ahead in their business model moves. The desired to give the hardware away today may prompt strong community and activist responses regarding data ownership and access. As Facebook struggles to govern violence footage on Facebook Live, how will companies like Taser / Axon and Vievu respond to public criticism of digital evidence gathering?

How are you planning ahead in your business model moves? Is there a cultural shift that implicates your business model innovation process? What foresight or sensemaking activities do you practice as a company to understand these cultural shifts? We’re curious to hear your thoughts.

Whether you are just starting, scaling into growth, or you are the market share leader, you are always looking new ways to generate value.

The most valued companies today neverstop creating new business models.

Profitable innovators change their business models twice as frequently as their peers.

> 90% of all business model innovations recombine existing ideas and concepts from other industries.

This sounds harder than it looks. How many times have you heard from your advisors, partners, investors, or senior management that you should “be more like Netflix.” Or maybe you’ve been told, “Let’s be the Uber of __________.” “You should be the Dollar Shave Club of _________.”

Right, so easy. All you need is 100 million dollars and a dream.

Maybe you genuinely have a vision for how to be the leading data aggregator in your field, the largest 2-sided marketplace, the most profitable subscription company in your category. But you don’t have everything at the start. Startups lack resources and leverage. Big companies lack the digital capabilities to move to new models. How do you get from here to there?

On the first axis you have time, and firm value.

The goal is to develop scenarios to help understand which decisions will create the greatest value.

The purpose of the Business Model Growth Map is to acknowledge you have more than one path to achieve your vision. You have options.

You can use this tool as a foresight exercise, a competitive analysis tool, and it’s a way to understand business model innovators and how they’ve grown.

The Business Model Options Growth Map Steps:

Let’s take a look at a startup meditation wellness company: MindTether. The founders of MindTether take meditation seriously, and they are concerned that the current app experiences provided by companies like Calm.com and Headspace are too singular, too self-oriented, too lonely. They want to create a shared experience and build a movement around meditation. Their core idea: a meditation social network.

They host a Business Model Journey session, where they define key scenarios and options for how to get started on the way to their big idea.

5 Steps to Breakthrough Business Model Options

Define the North Star

Explore business model archetypes

Create multiple business model growth options

Backcast to the present moment

Build, measure, learn and generate new options

1/ Define the North Star

The first step calls upon your visioning and foresight skills. What is the ultimate business model in the sky, your big vision, your true north? Imagine 10 years from now. You succeeded and achieved your vision. You attracted the people, the resources, and the runway to achieve your vision. You have the largest group of meditators on the planet who trust you, engage with you and other customers everyday.

What happened? How were people’s lives changed? How many people were impacted by your company’s products, services, and ecosystem?

MindTether sees a future in which 200 MM customers from all over the world participate in localized meditation groups every day, resulting in better overall health and wellbeing of the communities they serve. They have the largest subscription-based company, while members who cannot afford subscription are subsidized by health plans, workplaces, schools – because their benefit to society is so clear. That’s their big vision.

2/ Explore Business Model Archetypes

Next tour through relevant business model archetypes. Look beyond competitors and your core industry for inspiration to the rising business models of today’s economy. Ask team members to bring ideas to a business model generation session.

MindTether looks at the way business model archetypes are playing out in their core arena – mindfulness apps and meditation groups that meet in person. They look at brain training companies, and business models from health tech, and review multiple business model archetypes.

Remember the best business model innovations are just combinations of currently existing business models – so encourage your team to start sketching their ideas.

After you are inspired by other business model archetypes, host a brainstorming session to generate multiple business model growth options. Encourage ideas inspired by transformer-style mashups of archetypes and companies. Did you ever play garanimals as a kid? Allow for strange sounding combinations in your session.

Call on those with the closest customer proximity to develop value proposition concepts that address unmet needs and pain points.

You can ask for sketches, concepts, use the Business Model Canvas or Value Proposition Canvas, or focus your energy with this “Value Proposition Adlibs” tool.

Choose the best ideas (use group voting or filtering exercise) based on which business models generate the greatest value.

MindTether considers three primary options:

Real world subscription: people join flashmob-type group meditations in the real world

Virtual subscription: individuals sign up, and there is a discount for groups

Value-based care: selling the benefits of MindTether to insurance companies and get paid for lowering anxiety levels in a population

They map how all of these options could get them to their true north – but they want to know which first journey propels them there the fastest.

4/ Backcast to the present moment

Now that you have your vision and core business model ideas – backcast to where you are today. Backcasting is often more effective than forecasting. You start with your vision – your North Star, and then you ask the question: “What do we need to do today to reach that vision?”

They look to the capabilities, resources, and network they have today, and what they don’t have.

MindTether is a 3 person team – an app developer, a designer, and a mindfulness coach, with ability to develop and lightweight app. They live in NYC, which seems to be the primary launching pad for these kinds of wellness meditation apps. They are not hardcore developers. They do not have strong command of artificial intelligence, data science, nor are they highly skilled in making a new wearable device. But they decide that all of those skills are not needed to get started.

What they do know is that they have the right set of skills and resources and network to begin testing their two core ideas – virtual “free for groups” meditation and in person meditation flash mobs or planned meetups.

5/ Build, measure, learn and generate new options

The MindTether team creates a plan for the next few months to maximize learning.

They don’t just start building the app. MindTether’s team knows that the real value lies in their ability to connect engaged meditators in groups, which result in a network effect. Their first test is to understand who is in the most pain, what to build, and which business model best delivers.

To understand pain points and jobs to be done, the team starts in the real world, to deeply understand what people are looking for when they seek out meditation. By directly interviewing people in parks and coffee shops and meditation centers, the narrow in anxiety as the primary trigger for people to start meditating in the first place.

MindTether’s second hypothesis is to test how a group meditation solution would be a good match for the pain of anxiety. The team borrows a loft space from a friend and hosting their first daytime retreat. They start an Instagram feed to build interest in the event and to see which core message work best to get people to sign up and show up for the event. Not every message works. They find that anxiety is still taboo, or a lonely experience in search of a lonely solution. Their messages most resonate with a younger generation that is more willing to talk openly about anxiety and share their experiences publicly.

The third hypothesis helps MindTether narrow in on a target segment that has the most pain, but also respond to the call for group meditation and pay for the experience. They started to notice that those that were the most likely to follow up after the in person event were recent college grads, new to the city. These grads are overwhelmed with student debt payments, rent payments, and struggling to bring purpose and meaning to their first jobs out of school. They were also just forming and re-forming their friendships for their newly adult life.

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MindTether is now ready for an intense Lean Startup-style validation effort, but their approach is more strategic, and they’ve built up their business model pattern matching skills.

MindTether’s team decides to pursue option 2 as their first business model to start testing through prototypes, and they continue the build-measure-learn cycle until they have the early prototype and marketing messages tuned for product-market fit.

They know that once they find that high signal value-market fit, it will be time to focus their energies and attention on execution, customer development, product velocity, and later customer growth.

For now they need to keep their growth options open.

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Have you struggled to make sense of multiple business model options? Are there two or more paths you could pursue? Let us know at Reason Street – we’d love to hear from you.

Since the election, US stocks are mostly up. Except hospital stocks. Public hospitals like HCA are worth looking at the stock charts to see how wrong we were about the election – rising high the day before, tanking the day after.

Then there are the health insurance companies like Aetna and Cigna are on the rise. United Healthcare is the best-performing stock of the year.

The promised repeal of the Affordable Care Act (ACA, a.k.a. Obamacare) is expected to impact hospitals more negatively than insurers. A recent Barrons survey of C-Suite executives in healthcare found that “MCO (Managed Care Organization) executives are more optimistic than acute-care hospital executives about the outlook for the respective fundamentals in their industries.”

But as of today, we only know which way the winds are blowing. We do not know exactly how the ACA will change, or when, or what it specifically means for any given company strategy.

Do the same trends play out if you are a startup? Were your pre-election business model assumptions correct? Does the recent shift in political stance change your trajectory?

In short, yes. No matter what your political views, it’s time to stress test your assumptions, and determine how dependent you are on policy-driven shifts in your future plan.

First, Re-Locate that North Star

Look up from your to-do list, your weekly calendar, your scrum, sprint, or annual operating plan. Why did you get into healthcare in the first place? Answer that question on a personal level. Convene a futuring session with your team.

Has the ACA been positive for your business or are you still struggling to implement technology and systems to manage and measure care? How should healthcare happen? What are your ideas for a better future?

Ask big questions to frame and reframe your company’s direction. What role do you have to play in healthcare transformation driven not by federal policy shifts, but through connections and partnerships with other companies in the healthcare industry, not-for-profit organizations, advocacy groups, and your local community?

Second, Check Your Customer Target Assumptions

Who are your core customer segments? Were you selling to hospitals? Insurance companies? Pharma? Should your priorities shift in preparation for what comes next?

Even if you’re up and running and executing against your defined plan, it’s worth re-engaging in customer discovery. Pick a selection of health systems leaders, clinicians, administrators, and ask everyone how they envision the shift. You may find that your question is the first time they have stopped to pause and think about what is to come.

Third, Re-Validate Your Core Business Model Hypotheses

It’s time to go back to your original business model assumptions. If you haven’t been tracking changes to your assumptions using a Business Model Canvas tool, now is a good time.

Take a hard look at your core resources, activities, and partners – do you need to think about what you do differently?

Lastly, your biggest and boldest question is to re-consider your costs and revenues and stress-test where you fall in the shift to value-based reimbursement.

Fourth: Take a Stand on Value-Based Reimbursement

The hardest element to predict is how and when we start to shift to value-based care, payment based on outcome, rather than traditional fee-for-service.

The shift to value-based payment and care will cause health providers and everyone delivering to the healthcare system to change the way they bill for care. Instead of being paid by the number of visits and tests they order, devices used, and pharmaceuticals prescribed (fee-for service), providers’ payments will start to be based on the value of care they deliver (value-based care).

This shift is happening, but not everywhere. A number of health systems, not-for-profits and health companies and startups have each chosen where to play; with a number of stakeholders claiming bold stakes and risks, and others avoiding the change for as long as they can.

A rollback of key elements of the ACA will affect the contours of this shift, but the “train has left the station” according to many health leaders. Payers are demanding value-based payment models, integrated hospital systems are taking on population risk, and startups are experimenting with pay-for-outcomes and pay-for-performance models. Will you be a leader? Or a follower?

Finally: Rinse, Repeat and Lead

To be sure, those that work inside of healthcare complain that the pace of change is slow and incremental, particularly in front line health delivery systems. Startups have had to play at the edges, selling solutions consumers who can afford to pay, to workplace wellness efforts where ROI can be proven, or are living off of a derivative data-selling business model. Incumbent technology and service vendors are deeply locked in and want to protect their market share and flows of revenue and profit.

But one thing is certain – there is no comfortable status quo in healthcare. Even in the heart of the most cynical, money-minded hospital administrator, there is an acknowledgment that patients matter. The US is an outlier in health, and “not in a good way:”

If you believe your initiative or technology innovation can bend this curve away from more cost/worse outcome, then it’s time to double down. Change will come from government, but progress will come from leaders in the patient communities, advocates, caregivers, healthcare systems, and innovative companies that can move beyond our current trend. We only have our health and our lives to improve.